The Cost of Defence shows Australia risks falling behind its peers
ASPI’s Cost of Defence 2025–26, published yesterday, revealed that Australia risked trailing its peers in the region, Five Eyes and Europe unless the government promptly found additional money for defence.
It acknowledged that the government had backed the 2023 Defence Strategic Review and announced plans to lift defence spending towards 2.4 percent of GDP, as Prime Minister Anthony Albanese told the media in response to a question about ASPI’s report.
But Australia isn’t projected to reach 2.4 percent until around 2033-34, with most additional spending not arriving until the latter part of the period before then. At present, defence spending is barely higher than 2.0 percent of GDP, forcing the Australian Defence Force to scrimp on preparedness and sustainment as funds are diverted into building the future force.
In effect, the government is gambling that the ADF will not be called upon to defend Australia against a highly capable adversary, such as China, until nuclear-powered submarines and other key equipment become available in the 2030s and beyond.
While Australia drags its feet, its peers are shifting gears.
NATO Secretary General Mark Rutte expects that members of the alliance will set a new defence spending target of at least 5 percent of GDP at the NATO summit in the Hague next month—dramatically lifting their effort from the current benchmark of 2 percent, set in 2014. There are encouraging signs that even traditional laggards, such as Canada, will substantially raise defence spending.
Meanwhile, Europe is reviving its defence industrial base through such initiatives as the European Union’s €150 billion Security Action for Europe (SAFE) fund and is open to working selectively with trusted global partners, such as Canada, Japan, South Korea and Australia. A wider plan, ReArm Europe, could refocus the EU’s cohesion funds into defence expenditure and issue bonds to pool private capital into arms manufacturing.
Albanese has a chance to announce a step change in Australia’s approach to defence at the NATO summit, to which Australia, Japan, New Zealand and South Korea are usually invited as NATO’s Indo-Pacific partners (IP4). Defence Minister Richard Marles will be in Brussels next week for a meeting of NATO and IP4 defence ministers—a chance to lay the groundwork.
Beyond NATO, Albanese could accept the EU’s proposal for a security pact, which could benefit Australia’s defence base by unlocking access to European funds, markets and industrial partnerships.
Closer to home, many of our Indo-Pacific neighbours are investing in defence with a sense of urgency that Australia seems to lack. Taiwan is moving towards spending more than 3 percent of GDP on defence. Japan and New Zealand plan to reach 2 percent of GDP this decade. While that would still leave them behind Australia, it would represent significant increases in the shares of their national income spent on defence. Aiming for that is a remarkable feat of political courage given their domestic constraints and the short timeframe.
South Korea’s defence budget, around 2.3 percent of GDP, has grown by more than a third in real terms in less than a decade, with major investments in high-end capabilities. South Korean defence companies are also expanding, establishing production facilities overseas, including in Australia, and are significantly contributing to European rearmament.
Southeast Asia has the highest rate of growth in defence spending in the Indo-Pacific, although, as the Cost of Defence details, the picture is uneven.
For instance, Singapore has in recent years nudged defence spending close to 3 percent of GDP. That is less than the 5 percent or more of GDP that Singapore spent on defence for much of the 20th century, but its economy was much smaller then. There is much that Australia could learn from Singapore’s consistent approach to spending on military capability, as shown by its recent order for two more modern submarines from Germany to expand its undersea force to six boats.
Singapore is among many Southeast Asian countries that are spending heavily on naval and air force modernisation.
Of particular interest to Canberra, President Prabowo Subianto supports plans to more than double the percentage of Indonesia’s national income spent on defence, albeit from a current low level below 1 percent of GDP. We should remain sceptical about announcements and ideas, such as acquiring a second-hand aircraft carrier, that may never be realised. Even so, Prabowo’s willingness to raise the profile of defence in the national debate is instructive, especially in contrast to the muted handling of defence in the recent Australian general election.
Other than the Philippines, Southeast Asian countries have been reticent to acknowledge that defence spending is a reaction to China’s growing military power and assertiveness. For instance, Singapore has cited inflation as a reason for its recent defence investments, even though its defence spending has risen strongly in real terms since 2022. National statistics reveal the realistic undercurrent in Southeast Asian strategic thought, whatever the rhetoric.
There are statistical pitfalls in any comparative measure of defence investment or military capability. Economic growth partly explains Australia spending proportionately less on defence now than in the Cold War. Alternative measures of defence effort, such as the fraction of government expenditure allocated to defence, can be informative but are skewed towards countries with low taxation and social spending, such as Taiwan. Tallying military hardware and the headcount in uniform is also important, but shrewd observers know that the edge provided by technology, logistics, organisation, leadership and the elusive factor of morale are truly revealed only in conflict.
Willingness to forego butter for guns is an important expression of national resolve, which is vital for deterrence. The share of GDP spent on defence can be an effective way of communicating this to the public, allies and adversaries when coupled with wider government efforts to nurture strategic understanding.
It seems that our neighbours and friends assess that they’re facing the worst strategic circumstances since World War II, just as the Australian government reckons we do. But many of Australia’s closest partners are responding with a sense of urgency that Canberra seems unwilling to match.
Like Europe, we must relearn the tragic lesson that deterring a bully is cheaper, in lives and national treasure, than fighting one. Australia is not spending enough, fast enough, to keep the bullies at bay.